Calyx & Corolla (C&C) is a fast growing company with great potential. Their mail-order catalog provides customers with the freshest flowers in the market, delivered directly to one’s doorstep for the same price as local florists. Customers have been highly receptive to this model, and the company revenues have grown to over $10 million annually in just three years. Yet, even with gross profit margins of 76%, they have not turned a profit due to their high sales and marketing costs. While it may not be uncommon for a startup to take a few years to get in the black, the issue at hand is that C&C’s sales and marketing costs are growing just as quickly as their revenues. If their sales and marketing costs as a percentage of sales do not improve, they will struggle to reach profitability.
While we know that C&C’s sales and marketing costs are too high when viewed as a percentage of sales, this is not the only cause of their profitability issue. It is the result of the actual root problem: that C&C has failed to segment their market effectively and advertise accordingly. Currently C&C is operating under a push method, sending 12 million catalogs out each year, in which 10% go to prior customers. The balance of the catalogs go to recipients obtained via rented mailing lists. While this channel has the lowest customer acquisition rate (1-2%), it accounts for a disproportionate amount of their sales and marketing costs, as seen in Exhibit 1. While C&C is doing a good job maintaining their existing customer base, they are failing to effectively acquire new customers because they are not able to identify and reach them in an efficient manner.
C&C needs to change their marketing strategy and move away from mass distributing catalogs so they can reduce their sales and marketing costs and achieve a profitable status. Market segmentation is an effective step toward reaching target customers and better utilizing funds. After...